Signs of life

This is from the August/September 2012 issue of Commonwealth. I had been watch­ing and col­lect­ing sta­tis­tics and the over­all mar­ket for sev­er­al months, and I orig­i­nal­ly wrote this as a blog post. But it got so pop­u­lar — and passed around so much — that our CEO decid­ed to make it the mag­a­zine’s cov­er story.

Signs of life coverYes, Virginia, the hous­ing recov­ery is here, it’s well past the begin­ning, and it’s mov­ing strong­ly and steadily.

But I don’t expect you to believe that.

Back in March 2005, the cov­er sto­ry for this very mag­a­zine was “No Boom, No Bust, No Bubble.” In it, var­i­ous respect­ed econ­o­mists — includ­ing then-chair­man of the Fed Alan Greenspan — insist­ed there was no imme­di­ate dan­ger to the hous­ing econ­o­my. There was no bub­ble to wor­ry about.

A year lat­er, that non-exis­tent bub­ble burst. You know the rest.

What that means is that you’re expect­ed to every­thing you read here with a size­able chunk of salt.

You should, in fact, take every­thing with that same piece of salt, because it’s obvi­ous that even “fore­most econ­o­mists” don’t always have a clue. And a Realtor asso­ci­a­tion say­ing “The recov­ery is here” may not car­ry a lot of cred­i­bil­i­ty. But don’t dis­miss it. Read this sto­ry and check for your­selves. See if you see the same things.

There’s no sug­ar­coat­ing here. VAR has enthu­si­as­ti­cal­ly called shenani­gans on every­thing from jour­nal­ists’ sto­ries to NAR’s stats to gov­ern­ment fig­ures — whether they’re too pos­i­tive or too neg­a­tive. We real­ize that the extremes of breath­less enthu­si­asm or Eeyore-like neg­a­tiv­i­ty are sure ways to lose your credibility.

But when the news is good, we’re darned sure going to tell you about it.

The news is good.

You won’t find reams of sta­tis­tics here, or pages of charts com­par­ing this year with the Great Housing Crisis of 1825 or what­ev­er. It’s not about indi­vid­ual pieces of data. Instead, it’s a look at the gestalt — the big­ger pic­ture — based on the hous­ing news com­ing through the wire.

And that news is more often good than bad. The end­less tide of neg­a­tive news has been replaced, bit by bit, with positives.

You can cer­tain­ly argue some­thing like, “Well, the inverse­ly-cor­re­lat­ed regres­sive dol­lar-val­ue fig­ures show that hous­ing still has 28.412 per­cent (+/- 3.54%) to fall,” but num­bers don’t tell the whole sto­ry. Context does. Consider hockey’s Gretzky broth­ers: Wayne and Brent Gretsky are the high­est scor­ing pair of broth­ers in NHL his­to­ry. But Brent only scored a sin­gle goal. Numbers can be accu­rate and misleading.

We’ve passed bot­tom. We are in a recovery.

Good news

When I say we’ve hit bot­tom I don’t mean that every met­ric is going to be going up. Prices, for exam­ple, have a bit of ways to go down, and won’t be climb­ing back to 2006 lev­els for a while. I mean that the over­all bot­tom of the hous­ing cri­sis is past us.

You’ll see this if you look at the broad­er eco­nom­ic news, and if you drill down to hous­ing-spe­cif­ic data — as hous­ing goes, so goes the econ­o­my… and vice-versa.

Unemployment is down. Sure it’s not as low as we’d like, but it’s well below its peak and has been drop­ping steadi­ly. More jobs mean few­er delin­quen­cies (and thus few­er fore­clo­sures and REOs).

HARP is work­ing. Letting more peo­ple refi­nance at low­er rates puts more mon­ey back into the econ­o­my, and the Obama administration’s Home Affordable Refinance Program (now on its sec­ond iter­a­tion) is doing just that. It’s got trac­tion, too: Refinancing jumped in the first quar­ter, and if HARP expands again (to allow bor­row­ers with FHA loans to take advan­tage of the pro­gram), even more peo­ple will get a low­er rate — and more mon­ey in their pockets.

Granted, they aren’t using that mon­ey to buy a new house, but they will spend it — and that means jobs, and jobs means housing.

Delinquencies are down. Thanks in part to these first items, more peo­ple are able to pay their mort­gages. Fannie Mae and Freddie Mac’s sin­gle-fam­i­ly seri­ous delin­quen­cy rates have been drop­ping since ear­ly 2010, and the Mortgage Bankers Association says the delin­quen­cy rate for mul­ti­fam­i­ly mort­gages is also dropping.

Meanwhile, since January the nation­al con­sumer cred­it default rate — which mea­sures how good a job con­sumers are doing pay­ing cred­it card bills, car loans, and so on — has been falling. People are get­ting back on sol­id ground, albeit slowly.

Interest rates are still crazy low. Despite some econ­o­mists’ pre­dic­tions of rates begin­ning to climb any day now, it hasn’t hap­pened. And even if they did begin to inch up, it’ll take a while for that to affect buy­ers. The aver­age con­sumer isn’t going to say, “I would have bought at 3.95%, but not at 4.1%.” In fact, if rates start to inch up it may pull some iffy buy­ers off the fence — they won’t want to miss out on record-low mortgages.

Lending is loos­en­ing. The Federal Reserve Board found that bor­row­er demand for mort­gages is increas­ing, and thus lenders are prepar­ing to “increase their expo­sure to such loans.” Put anoth­er way, the pen­du­lum is start­ing to swing back.

It’s not just the Fed rec­og­niz­ing the increas­ing demand. Credit infor­ma­tion ser­vice Experian just released a white paper aimed at lenders, “Expanding the mar­ketable uni­verse.” Its goal is to help those lenders expand their offer­ings beyond top-tier bor­row­ers — to find and tar­get “near-prime” clients — because Experian sees that lenders are final­ly ready to get back in the game.

Rents are ris­ing. At one point, peo­ple turned to rent­ing as a less-expen­sive (at least in the short term) alter­na­tive, espe­cial­ly when they couldn’t afford or qual­i­fy for a mort­gage. But thanks to that increased demand, rental rates are going up. And up. In some places they’re set­ting records, and they’re mak­ing home own­er­ship look like a bet­ter option — some­thing that bodes well for the long-term.

Short sales are get­ting more effi­cient. Earlier this year, the Federal Housing Finance Agency had had enough of lenders tak­ing for­ev­er to process short sales. It released a set of rules to speed the process, requir­ing mort­gage ser­vicers to respond to short-sale requests with­in 30 days. (They can take up to 60 days in cer­tain circumstances.)

Soon after the gov­ern­ment gave them what-for, RealtyTrac report­ed that short sales were up sig­nif­i­cant­ly. And in May, in MRIS ter­ri­to­ry (which includes a large por­tion of Virginia), there were more short sales than fore­clo­sures — and that’s good for every­one, espe­cial­ly as the total num­ber of dis­tressed sales is going down.

Inventory is down. Nationwide, list­ings are down more than 20 per­cent from a year ago, and con­tin­ue to drop. Virginia’s inven­to­ry was down more than 37 per­cent in May from a year before, although some areas are see­ing larg­er drops than oth­ers — Northern Virginia had 16 per­cent few­er list­ings in May, for exam­ple, while the Richmond-Petersburg area saw a 27 per­cent drop.

“Shadow inven­to­ry” nev­er flood­ed the mar­ket. When banks final­ly paid the piper for the robo-sign­ing scan­dal, con­ven­tion­al wis­dom held that there was going to be a rush of fore­clo­sures and REOs flood­ing the mar­ket, dri­ving prices down and push­ing under­wa­ter sell­ers fur­ther out of the mar­ket. It nev­er hap­pened. (And Virginia didn’t have much of a back­log anyway.)

In fact, CoreLogic found that shad­ow inven­to­ry — homes not on the mar­ket, but soon expect­ed to be — was down almost 15 per­cent from a year ago.

As hous­ing expert Bill McBride (who writes the well-respect­ed Calculated Risk blog) put it, “[I]t is hard to imag­ine a huge wave of fore­clo­sures. If any­thing it will be more like a sus­tained high tide in cer­tain judi­cial fore­clo­sure areas.”

Buyers are return­ing. Maybe they aren’t com­ing at the rate we all want to see, but buy­ers are com­ing back. Whether it’s because peo­ple can’t resist the low prices or the low mort­gage rates, or sim­ply because they’re feel­ing more con­fi­dent, more peo­ple are out look­ing. In some areas, as the Wall Street Journal explained in a head­line, “Stunned Home Buyers Find the Bidding Wars Are Back.” In oth­ers, it report­ed, “Buyers Frustrated by Low Inventory, Rising Prices.

Investors are invest­ing. Housing as an invest­ment — in the sense of cre­at­ing rentals, not flip­ping — is catch­ing on. Investors are pour­ing mon­ey into the mar­ket, both by buy­ing sin­gle-fam­i­ly homes and by build­ing mul­ti-fam­i­ly ones. A Wall Street Journal head­line sums it up nice­ly: “Investors See Gold Rush in Foreclosure-to-Rental Properties.” After all, even­tu­al­ly all those 20-some­things who moved back with mom and dad will have to leave the nest… again.

Forward-look­ing indi­ca­tors are up. Whether you’re view­ing stats from home­builders (whose con­fi­dence lev­el is ris­ing, by the way), or the Census Bureau, or Virginia Tech (which does its own month­ly study), the trend is the same: Permits and con­struc­tion are both ris­ing. So, too, are mort­gage appli­ca­tions; in June they hit their high­est lev­el since 2009.

Housing starts have risen more than 36% from the mar­ket bot­tom, and home­builders report a big boost in order growth. Oh, and con­struc­tion employ­ment is up, too — more than 100,000 jobs from the bottom.

Does it all mean anything?

Yes, yes it does. Sales are going up. That sim­ple. Some places are see­ing faster gains than oth­ers, and the over­all shift isn’t as fast as we’d like, but the num­bers are there. (Remember, things drop quick­ly but they tend to rise slowly.)

In Virginia, since 2010 almost every month’s sales have been above those of the year before. The lat­est fig­ures (from May 2012) show statewide sales up six per­cent from 2011; in April the year-on-year gain was 10 per­cent. In Southwest Virginia, sales were up a whop­ping 38.2 per­cent from 2011 to 2012.

Of course it’s pos­si­ble that your area isn’t see­ing any bright spots. Recoveries are uneven. But the mar­ket as a whole is improv­ing, and the tide will even­tu­al­ly raise all our boats.

Yes, but what about prices?

Prices are down, and they seem to keep drop­ping (at least nation­al­ly) — 2.9% over the past year. This isn’t sur­pris­ing. This is what it looks like when the mar­ket gets back to normal.

Remember that the hous­ing bub­ble inflat­ed prices above real­is­tic and ratio­nal lev­els. In oth­er words, we shouldn’t expect them to get back to that lev­el — not for some time, at least. Instead, they’ll drop till they hit his­tor­i­cal norms, then roll along with ups and downs, gen­er­al­ly track­ing infla­tion. (Case and Shiller have shown that home prices haven’t real­ly changed much — in terms of afford­abil­i­ty — in more than a century.)

A recov­ered mar­ket won’t have prices ris­ing every month. They’ll go up and down, month to month, with a bit more on the upside over the longer term.

Of note is the fact that REO prices have actu­al­ly risen — 5.5 per­cent over the past year. Investors know good deals when they see them, as do indi­vid­ual home buy­ers. Higher demand means high­er prices, and that in turn means less drag on the prices of non-REO property.

There are also more short sales hap­pen­ing that fore­clo­sures. That’s bet­ter for prop­er­ty val­ues, and it’s anoth­er para­chute keep­ing declin­ing prices from drop­ping too fast. And list­ing prices, accord­ing to Trulia, are inch­ing up.

Still, what we saw in 2006 and 2007 wasn’t the norm, so don’t expect prices to get back there any time soon. Talk of prices hit­ting “bot­tom” is real­ly talk about prices return­ing to their nor­mal level.

These changes aren’t always huge or earth­shak­ing or head­line mak­ing. But they’re con­sis­tent and they’re across the board, from lenders to builders to buy­ers. And they all point to a turn­around in the market.

Is it a guar­an­tee? Of course not — just check out the “Downsides” side­bar. But there is enough good news com­ing in and com­ing in reg­u­lar­ly to make it fair­ly clear that the worst of the mar­ket is behind us.

Sidebar: Downsides (in no particular order)

Political grid­lock. Once upon a time, our lead­ers made deci­sions based on what they thought was best for the coun­try. They dis­agreed about what that was, but we were pret­ty sure they all had our com­mon good in mind.

These days, though, it’s all about par­ti­san bick­er­ing. If some­one from The Other Side has an idea, it must be bad. Votes that should take hours take weeks. Decisions that are sim­ple are bogged down in minu­ti­ae. This means that the peo­ple who are actu­al­ly try­ing to do things are faced with a long-term uncer­tain­ty about what’s going to come out of Washington, and that’s no good for a mar­ket look­ing to stabilize.

Consumer con­fi­dence could fal­ter. Yes, how peo­ple feel about a sit­u­a­tion can affect what actu­al­ly hap­pens. As con­sumers become more con­fi­dent in the mar­ket they’re more like­ly to go out and buy — the spec­tre of a prop­er­ty-val­ue crash is no longer over them., which had been going up, began to decline.

The reverse is also true, and while con­sumer con­fi­dence has in gen­er­al been going up, it’s not a steady rise. If con­sumers lose faith in the mar­kets, it will take a while for it to be restored.

Europe. It’s a finan­cial mess over there. Will Greek leave the euro? Will Spain need anoth­er bailout? Will Italy? What does it all mean, any­way? Some of these may be answered by the time you read this, oth­ers will remain up in the air. But European mess­es have a ten­den­cy to spill over to this side of the pond — although how it would affect things here is everyone’s guess.

Student loans are a drag on the future. Young folks are the buy­ers of tomor­row. In the­o­ry. Trouble is, they’re find­ing them­selves under a load of crip­pling debt from stu­dent loans that will take many years to pay off — years when they could be sav­ing for a down pay­ment or pay­ing a mort­gage. That means that as we pre­dict the mar­ket going for­ward we have to assume a gen­er­a­tion with much less dis­pos­able income.

Expensive rentals won’t last for­ev­er. Although the high demand for rentals has made them more expen­sive, that won’t last for­ev­er. Investors are buy­ing up fore­clo­sures to turn them into rentals (they, too, can read the writ­ing on the wall). That means sup­ply will even­tu­al­ly increase to meet demand and, pos­si­bly, dri­ve rents down and make them more attractive.

Lower sup­ply could be a bad thing. Normally after the past few years we’d be glad to see all that excess inven­to­ry absorbed by the mar­ket, whether by indi­vid­u­als or investors. But low sup­ply is also caused by peo­ple being unable or unwill­ing to sell their homes; if some­one is deep enough under­wa­ter, he won’t both­er list­ing his home even if he wants to move.

CoreLogic’s econ­o­mists looked at this very issue and found that yes, there was a sol­id cor­re­la­tion between how much neg­a­tive equi­ty there is in an area and how many homes are for sale. More under­wa­ter own­ers mean less inven­to­ry. Simple as that.

It gets worse. As more peo­ple get out of neg­a­tive equi­ty sit­u­a­tions (though short sales or sim­ply accept­ing less), it means they’ll have less mon­ey for a down pay­ment on their next home. And lenders aren’t ter­ri­bly inter­est­ed in no-down-pay­ment loans, mean­ing own­ers will become renters.

So when we see that “months of sup­ply” num­ber go down, we’re see­ing a symp­tom — and we don’t know how much of it is caused by some­thing good (more sales) and how much is because of some­thing bad (under­wa­ter owners).

Unemployment fig­ures lie. The way the fed­er­al gov­ern­ment has mea­sured unem­ploy­ment for the past decade or so is mis­lead­ing. It doesn’t count peo­ple who want a full-time job but have run out of unem­ploy­ment ben­e­fits, or those who are work­ing part-time because that’s all they could get. Real unem­ploy­ment is actu­al­ly two or three points high­er than the num­ber you hear on the news. And when you read about unem­ploy­ment going down, that just means peo­ple are com­ing off the unem­ploy­ment rolls — not nec­es­sar­i­ly that they’ve found full-time work.


Sidebar: Who’s on the bandwagon?

Harvard’s Joint Center for Housing Studies: While too soon to tell with con­fi­dence, the worst may be over. [snip] The FHFA Home Price Index…also showed a year-over-year increase in the first quar­ter 2012, pro­vid­ing fur­ther evi­dence that home prices are final­ly stabilizing.

Tom Lawler, inde­pen­dent hous­ing econ­o­mist: “As always, of course, real estate is local. Nationally, how­ev­er, I believe the hous­ing mar­ket has bot­tomed, both in terms of pro­duc­tion (starts), sales, and, with a lag, prices. Don’t expect rapid rebound…”

Zillow: “With stronger home sales, we’ll see a reduc­tion in the amount of vacant hous­ing inven­to­ry and an improved abil­i­ty to absorb fore­closed homes. This increased demand will even­tu­al­ly start to put a floor under home values.”

Brad Hunter, chief econ­o­mist for hous­ing-infor­ma­tion ser­vice Metrostudy: “I think we reached the bot­tom at least a year and a half ago for hous­ing starts and hous­ing demands. For prices, in some mar­kets we have reached bot­tom – but not all.”

Glenn Kelman, CEO of Redfin: “We hit the bot­tom last year. I don’t think that means it’s going to be a V‑shaped recov­ery. There will be ups and downs and sales vol­ume isn’t going to recov­er in any mean­ing­ful way.”

Bill McBride, econ­o­mist at CalculatedRisk: “Clearly new home sales have bot­tomed. Although sales are still his­tor­i­cal­ly very weak, sales are up 25% from the low, and up about 15% from the May 2010 through September 2011 average.”

Rick Sharga, exec­u­tive vice pres­i­dent, Carrington Mortgage Holdings: “I think we’re either at or very, very near the bot­tom, and that prices will sta­bi­lize on a nation­al basis this year.”

Budge Huskey, pres­i­dent and COO of Coldwell Banker Real Estate: Besides the obvi­ous improve­ment in the labor mar­ket, “there are some fun­da­men­tal things that are shift­ing in the real estate space that bode well for the bal­ance of the year,” says Budge Huskey. “We’ve had sev­er­al straight months of pos­i­tive hous­ing data [that’s] real­ly been in line with the more pos­i­tive eco­nom­ic data. They are going in lockstep.”